Red-hot ethanol RINs move toward mainstream with futures

* Electronic platform for RINs in the works

* Ethanol RIN market estimated $9 bln value

* Market volatility spurs fears of fraud

By Carey Gillam

KANSAS CITY, May 10 A little more light is about
to fall on the murky, sometimes messy market for renewable-fuel
credits, with the launch next week of the CME Group's first
futures contracts for the government-mandated credits, known as
"RINs."

Created by a U.S. program aimed at boosting the use of
renewable fuels such as ethanol in domestic motor fuel,
Renewable Identification Numbers (RINs) have until recently been
regarded as a somewhat untamed backwater of U.S. energy and
agricultural markets, where trading is unregulated and pricing
is sometimes hard to peg.

But ethanol RIN values have recently skyrocketed in price
and volume has spiked as speculators join oil refiners, gasoline
importers and others in a scramble for the credits, which are
critical for oil companies to meet U.S. mandates for renewable
fuels.

A 20-fold surge in prices this year has roiled Washington as
oil industry leaders warn that consumers could get hit with
higher gasoline prices if Washington does not step in.

In an effort to capitalize on the market interest, CME Group
Inc., owner of the world's largest futures exchange,
will launch futures contracts for ethanol credits and other
renewable fuels on May 13, allowing users to trade them
alongside its benchmark crude and gasoline products. The
IntercontinentalExchange launched its own on April 29.

"There is a lot of interest building around it," said Dan
Brusstar, senior director of energy research for CME Group.
"Right now you don't have good transparency. A lot of companies
are leery of trading physical RINs. It (futures contracts) will
bring some transparency to the market."

But some market experts say many more steps are needed to
bring transparency to the $9 billion ethanol credit market.

"It's so new and it's such a volatile market. It is really
messy," said Jeff Hove, vice president of RinAlliance, an
Iowa-based aggregator and trader of RIN credits who handles RIN
trades for more than 200 clients.

38 DIGITS

A RIN is actually a 38-digit number created for each gallon
of renewable fuel. Typically the biofuel is then sold - together
with the attached RIN - to an oil company that needs the fuel in
order to blend with regular gasoline or diesel to meet the U.S.
Renewable Fuel Standard.

Refiners and other so-called "obligated parties" that
produce or import gasoline and diesel are required to present a
certain number of RINs to the U.S. Environmental Protection
Agency as proof of compliance with the RFS mandate. The policy
is aimed at reducing the nation's reliance on oil.

But some companies may have more RINs than they need, and
some may have less - hence the evolution of a secondary market
where the credits can be traded.

Without a central platform, packages of the ethanol credits
are peddled by brokers who mostly rely on email and instant
messaging exchanges with interested parties. Price discovery is
often difficult, making some participants wary. Regulation is
still evolving, spurring fears about fraud and pricing bubbles.

This March, prices for ethanol RINs shot up to about $1.04 a
gallon, from only five cents four months earlier, fueling a
debate about the knock-on impact for domestic fuel prices and
the impact of speculation on the nascent, shadowy market.
Ethanol RINs for 2013 were trading at about 78 cents a gallon on
Friday.

HIGHER PRICES?

Refiners have been lobbying Washington lawmakers and EPA
officials to roll back renewable fuel mandates, claiming they
are limited in how much they can blend and how much they can
afford to spend on credits.

They say the price spike was due to the abrupt realization
that there may be a shortage of RINs next year, when oil
companies may be required to increase use of renewable fuels to
the equivalent of more than 10 percent of the nation's gasoline.
The companies, however, may not be able to sell it all at gas
stations, most of which are so far unwilling to sell a higher
ethanol mix than E10.

Consumers will pay the price, they say.

"The surprise is over and, like every other manufacturing
cost, it must be passed on," Tom O'Malley, chairman of New
Jersey-based refiner PBF Energy, said on a recent conference
call with analysts.

Ethanol proponents say it is the oil industry, which is
fighting efforts to blend more ethanol into gasoline, that is
responsible for driving up RIN values. They argue that use of
ethanol in gasoline has overall reduced pump prices.

Whatever the forces and factors, many of those participants
in the market say growing volume and more volatile pricing for
the credits means tighter regulation and more standardization is
needed, and soon.

"RIN trading is still in its infancy," said Progressive
Fuels Limited analyst David Dunn, whose company is partnering on
development of an electronic trading platform for RINs.

WASHINGTON, Dec 9 Aetna Inc's chief
executive denied on Friday that its withdrawal from some
Obamacare exchanges was in retaliation for government efforts to
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